Talking Points:
- Dollar Reaches Fresh Five-Year High with Little Enthusiasm
- Euro Rebounds as ECB Ranks Break on Push Towards Open Stimulus
- Yen Crosses Heading for Breakout as Currency Warning Weighs
Dollar Reaches Fresh Five-Year High with Little Enthusiasm
Another day and another five-and-a-half year high for the Dow Jones FXCM Dollar Index (ticker = USDollar). Yet, Monday’s advance hardly reflects the level of gusto we would normally expect of a market hitting a multi-year peak or trough. Volume across the majors tapered and performance was unbalanced. The Dollar managed to gain versus the Japanese Yen and commodity bloc, but it would lose ground against the European currencies. For a currency that is drawing much of its strength indirectly from the relative depreciation of its most liquid counterparts, inconsistency can indicate serious trouble for this nearly five-month bull trend.
Looking at the fundamental backdrop for the Dollar itself, the calendar items would offer up weak resistance to speculation of an earlier first Fed rate hike. The Chicago Fed’s National Activity Index for October disappointed expectations but was still in positive territory – indicating economic growth. Along similar lines, Markit’s Composite PMI for November cooled for a fifth consecutive move; but it nevertheless remains in expansionary territory (above 50). A more tepid view of US growth certainly curbs optimism, but the economy’s contrast to the Eurozone and Japan is still marked enough to confer relative strength. Ahead, the docket fills out as the week is crammed into a calendar shortened by the holiday. The second reading of US 3Q GDP and a round of housing data (FHFA and CaseShiller) will likely be headline darlings. However, the more economically material event risk is the November consumer sentiment survey and two bond auctions (2-year fixed-rate and 5-year Treasury sales). Eurodollar and Fed Fund futures are currently pricing in a 0.50 and 0.79 percent benchmark rate by December 2015.
Euro Rebounds as ECB Ranks Break on Push Towards Open Stimulus
Last week, the FX market closed on a very dovish view from ECB President Mario Draghi. The central banker maintained a tone of exasperation towards economic trouble and insinuated greater monetary policy support may be needed to overcome economic stagnation and dis-inflation. With EURUSD close to shifting a tide a decade in the making (a break of 1.2000 could significantly embolden the bears), the market is anxious to see the policy group scale up to the same magnitude of stimulus as the Fed or BoJ programs before it. Yet, doubt is starting to creep in. Data this past session was a modest counterbalance to the dovish drive. The German IFO business sentiment survey unexpectedly improved for the first time in seven months. More troublesome for the bears though was the discord arising from ECB members in scheduled speeches. Council member Nowotny replied to a question that extra stimulus coming as early as Q1 2015 could be ‘too early’. Much more distinct in his remarks, noted-hawk Jens Weidmann said there are “high legal hurdles” to quantitative easing. As much dovishness has been priced into the Euro these past six months, moderation can be treated as ‘bullish’.
Yen Crosses Heading for Breakout as Currency Warning Weighs
Japan’s collective monetary policy regime is arguably the world’s most aggressive with the Fed closing the tap on QE3. Yet when is that dovish bias fully priced? USDJPY has advanced over 4,000 pips since the BoJ first hinted at stimulus in 2H of 2012. Left to its own devices, the market would likely take its complacent cues on other markets and continue to let the trend ride. However, there are internal conflicts arising for Japan’s policy regime. BoJ Governor Kuroda this morning sounded an optimistic tone on growth and the policy bearings, but the BoJ minutes were mixed on both. Hanging over the market is Finance Minister Aso’s warning last week that the Yen may have fallen too far, too fast.
Chinese Renminbi Posts Biggest Daily Drop in 8 Weeks
Major monetary policy changes from China are typically unexpected and carry a heavy impact on the local financial market. Last week’s surprise PBoC rate cut – the first in two years – led to a clear run in global equities and capital market benchmarks. In FX, the announcement led to the Chinese Renminbi’s biggest drop against the US Dollar (USD/CNH) since September 29 which would also represent the fourth largest jump for the exchange rate for the year. Immediate follow through, however, looks just as restrained as the previous two swells.
Swiss Franc: SNB President Warns Against Gold Vote, Yields Signal Market Expects More
Swiss National Bank President Thomas Jordan made another plea to the country this past weekend to encourage a ‘No’ vote on the upcoming Gold Referendum vote. The bill that would require a significant increase in the bank’s purchases of gold threatens to significantly diminish the group’s ability to execute its monetary policy efforts. Whether the referendum passes or not, the market is increasingly aware of the pressure on EUR/CHF’s 1.2000-floor by external factors. With rates driving towards zero, the probability of new stimulus efforts seems to be rising.
Emerging Markets Show Limited Follow Through to PBoC Rate Cut, Rubles Extends Rally
The impressive 3.2 percent rally from the MSCI Emerging Market ETF this past Friday (the sharpest in 14 months) would find little follow through at the start of this new week. The PBoC’s rate cut added another round of global stimulus leverage, but the amplitude from subsequent waves of support seems to be drawing less and less global satisfaction. Meanwhile, the Russian Ruble has rallied for a sixthday through Monday.
Gold Breakout Pressure Builds as Central Bank Commitments Questioned
At the end of the past week, ECB President Draghi’s vow to spur inflation as quick as possible and China’s rate cut moved the global stimulus needle. And yet, gold barely budged. Monday, dissension within the ECB and BoJ ranks has sapped the anti-currency appeal of the commodity; but once again, the currency remains stoic. The steady outflow of speculative funds in ETFs and futures may be blunting its sensitivity.